“Investors who use pooled fund structures as a partial or complete substitute for direct investment in underlying securities can get low-cost access to a wide variety of asset classes from the world’s best money managers.”

Right? Right!

“Investors who use pooled funds face being charged excessive fees for unsuitable products by unscrupulous managers.”

Right? Right!

The fact that both of the above statements are true shows that the right decision depends on specific circumstances as well as on general principles. Each case should be looked at on its own merits.

For example, using funds can offer significant cost savings especially for medium and smaller institutions who are happy to invest alongside other in-vestors in a pooled or commingled vehicle.

Economies of scale for the manager and custodian, as well as better dealing terms, mean that the cost to the client can be considerably lower than direct investment. Indeed, for small clients it may be the only realistic option, since money managers are usually unwilling to offer a segregated service for portfolios below a certain level.

However, clients should compare the manager’s fee schedule for the fund to that which applies to a segregated client of similar size and composition, and should make sure that excessive differences are either convincingly explained or rebated down to a more appropriate level.

Tax is another potential problem. Many fund structures are less fiscally attractive than direct investment, because - depending on where they are legally situated - it may be difficult or even impossible for them to reclaim withholding tax on the income stream from the underlying assets.

Flexibility is another advantage of funds. Big shifts in asset allocation can be made more smoothly by adding to or liquidating holdings in a fund or funds than instructing the manager to make the necessary adjustments to the underlying portfolio, where complex and expensive derivative strategies will be needed if urgent action is required.

Similarly, hiring and firing managers is much simpler; selling fund A and buying fund B takes much less time and effort than supervising the transfer from manager A to manager B of every single line in a directly owned portfolio. However, some managers impose back-end loads and switching fees which cut into these benefits In some cases an investor who withdraws from a fund may be reimbursed not in cash but with a pro rata share of the underlying securities; the justification for this is that if a big investor in an open-end fund pulls out and demands cash, this would hurt the interests of remaining investors since the managers would have to sell assets in a hurry on disadvantageous terms

Whether you choose to buy a fund or invest directly, you will need to do a lot of research on the asset manager. If you choose to buy a fund, you will also have to make sure that the fund’s structure is right for you. Investing in funds can be rewarding, but is not an easy option.